2001 Annual Report - Investor Relations - Sherwin Williams

letter to shareholdersBy any measure, 2001 will be remembered as an extraordinary year.It was a year of tough business conditions in a tough economy that affected us all.It was a year of a shocking national tragedy that touched us deeply. It was a yearthat brought our nation together and caused us to reflect upon our individual, family,community and corporate values. At The Sherwin-Williams Company, our culture isshaped by the values we have adhered to for the past 136 years. Our Annual Report toShareholders begins by naming a few of these cornerstone values. Words like strength, stabilityand security have always been woven tightly into the fabric of our company just asthey reflect what is good and right about our country.In 2001, Sherwin-Williams generated sales of $5.07 billion,which was a 2.8 percent decline year over year. Netincome came in at $263.16 million vs. $309.65 million in2000, before a charge for impairment of long-lived assets.Diluted net income per share finished 2001 at $1.68 vs.$1.90 before the impairment of long-lived assets charge.While the landscape of American business was filled withcompanies that fared far worse, we take no satisfactionin this relative comparison. We are disappointed withour results.Despite previous widespread forecasts, we recognizedearly in the year that an economic recovery in 2001 wasn’tlikely to occur. It was clear that our track record of 23 consecutiveyears of improved earnings was in jeopardy.Management reacted quickly by implementing a programwe called “Challenge 24.” The goal was straightforwardand simple: leave no stone unturned in an effort to achievea 24th consecutive year of improved earnings. Challenge 24was a rallying cry for each employee. We wanted to unleashthe talent, knowledge and power of 25,000 employeespulling in the same direction.Unfortunately, the combined energy and effort of ourteam was not enough to overcome the significant challengesposed by a weak global economy. Although our string ofconsecutive years of improved earnings ended at 23, Challenge24 made us a stronger company and helped us achievesome impressive gains.In a year of lower sales and earnings, investors look forsigns of strength, such as a company’s ability to generatecash. This past year, through excellent management of workingcapital, we increased free cash flow by $145.65 millionto a record $388.09 million. We define free cash flow as netoperating cash available after dividend payments and capitalexpenditures.Two factors contributed heavily to this strong performance.We reduced accounts receivable and inventory levelsby a combined $133.63 million and decreased days outstandingon both accounts receivable balances and inventory.Our selling, general and administrative expenses were loweryear over year for the first time in 20 years. This was accomplishedwhile still making significant investments in ourcompany. We also were able to reduce headcount throughthoughtful and responsible management of our humanresource needs.Our increased free cash flow was used to furtherstrengthen, stabilize and secure our company in a numberof ways. We retired $123.06 million of debt andincreased our year-end cash position by $115.92 million.We also used the cash to make an important acquisitionin our Paint Stores Segment by purchasing the net assetsof the Mautz Paint Company, including their 33 paintstores in the Midwest. Additionally, we bought back 6.7million shares of the company’s common stock on theopen market.On the strength of our free cash flow performance, in2002 the Board of Directors approved our 23rd consecutiveincrease in first quarter dividend payments. While 2001was not the year we had hoped for, we nonetheless viewthese results as a positive indicator – during an especiallytough year – of management’s commitment to fiscal responsibilityand shareholder value.Paint Stores SegmentThe Paint Stores Segment increased sales by 0.7 percentover last year to finish the year at $3.21 billion. Operatingprofit came in at $390.49 million, which was a decrease of5.1 percent from 2000’s performance. Sales of architecturaland industrial paint gallons increased but were offset by5